WHO REALLY COUNTS THE MONEY?

Acrossall markets in Asia, stocks are down. As of this writing, the MSCI Asia Pacific Index had plunged to an eight-week low of 98.57 from a recent high of 105.17 in mid June on speculation a U.S. economic recovery will be delayed. From where I sit, it looks like markets in this region are in for an anemic couple of weeks with analysts suggesting that emerging markets have grown expensive.

The focus has returned to the economic releases in the U.S. A monthly decline of 467,000 non-farm payroll jobs, a further decline in the workweek to a record-low 33.0 hours, and a flattening of average hourly earnings point to further weakness in income and factory output. While many are expecting a recovery as early as the end of the summer, a good number may not be willing to hold their breath that long.

The strongest driver of Philippine stocks since the rally took off in late March has been domestic liquidity. This country evidently has a widening savings-investments gap which sees very few alternatives for decent returns. Most Filipinos prior to 2006, have been very used to double digit interest rates on their time deposits or government treasury bills that very few had really taken time to check out what other possibilities exist for their excess savings. Furthermore, prior to last year’s collapse of Lehman Brothers and the fiasco brought about by behemoth international banks, money had usually flown out of the system to these so-called wealth managers. With the realization that the risk/reward ratio in major markets are no different than in emerging markets like the Philippines, the smart money is staying close to home.

Thus, the surplus domestic savings has even grown bigger, and it is this liquidity that will continue to drive the stock market. It is also the reason why, in spite of deeper consolidation in other markets, ours has seen relatively shallow dips. There is really very little reason why stocks should move into dirt cheap values. A good number of stocks continue to present decent earnings per share and even attractive dividend yields specially when compared to the very low interest rates in the fixed income markets. As a matter of strategic allocation, last week’s BSP policy rate cut should encourage investors to radically increase the weightings of equities in their portfolios.

Nevertheless, investors should be careful of any negative effect that the regional and global markets have on local stocks. My formula for caution is to avoid stocks that have high overbought readings and look to buy those that are close to their oversold levels.

Today’s price action provides clues to the sentiment of local investors. The market opened with strong buying of TEL (PLDT) which had been oversold the past few trading days. The stocks that took the market down were SM, MER, ALI, ICT, FGEN, MBT, BPI and MWC. These stocks had approached overbought readings so it is no wonder that when investors caught signs of regional weakness, these are the first ones they would sell. If investors continue to pare down portfolios in the next few days in sympathy to the world markets, these same stocks should be good choices for permanent places in my portfolio particularly if stock prices move down some more.